Supply and demand theory shows how consumer preferences determine consumer demand for commodities, while business costs determine the supply of commodities. The increase in the price of a particular commodity occurs either because the demand for the commodity has increased or because the supply of it has decreased. The same is true for every market, from food to land. Changes in supply and demand drive changes in output and prices.
The Demand Schedule
Both common sense and careful scientific observation show that the amount of a commodity people buy depends on its price.
- The Higher the price of an article, other things kept constant, the fewer units consumers are willing to buy.
- Lower the price of an article, the more units of it are bought, provided other things are kept constant.
This relationship that exists between price and quantity bought is called the demand schedule or the demand curve.
The Demand Curve:
The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis.
Law of down-sloping demand:
The demand curve will move downward from the left to the right, which expresses the law of demand— as the price of a given commodity increases, the quantity demanded decreases, all else being equal.
A Downward sloping Demand Curve relates Quantity Demanded to Price.
Quantity demanded tends to fall as price rises for two reasons:
- Substitution Effect-
When the price of particular goods rises, it will substitute other similar goods.
- Income Effect-
This comes into play when a higher price reduces quantity demanded.
The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand.
If a 50 percent rise in corn prices causes the quantity of corn demanded to fall by 50 percent, the demand elasticity of corn is 1. If a 50 percent rise in corn prices only decreases the quantity demanded by 10 percent, the demand elasticity is 0.2.
The demand curve is shallower (closer to horizontal) for products with more elastic demand and steeper (closer to vertical) for products with less elastic demand.
The market demand curve is found by adding together the quantities demanded by all individuals at each price.
Market demand curve also obeys the LAW OF DOWNWARD SLOPING DEMAND If prices of certain sets of products drop in the market, the lower prices attract new customers through substitution effects..
In addition, a price reduction will induce extra purchases of goods by existing customers through both the income and the substitution effects. Conversely, a rise in the price of a certain set of goods will cause some of us to buy less.
Forces behind the Demand Curve
👉Average levels of income –people with sufficient liquidity is the best consumer
👉The size of market/population- bigger city has bigger consumption demand
👉The prices and availability of related goods –like pen and pencils
👉Tastes or Preferences –like consumption of fish in Bengal
👉Special Influences -like use of umbrella in rainy season
Shifts in Demand
The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve.
Non-price determinants of demand are those things that will cause demand to change even if prices remain the same.
In other words, the things whose changes might cause a consumer to buy more or less of a good even if good’s own price remained unchanged.
Some of the more important factors are mentioned below:
- The prices of related goods (both substitutes and complements).
However, demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances; so, any circumstance that affects the consumer’s willingness or ability to buy the good or service in question can be a non-price determinant of demand. As an example, weather could be a factor in the demand for tea.
|Graph for Demand Shift|
Shift in Demand on account of Income:
When income increases, the demand curve for normal goods shifts outward as more will be demanded at all prices, while the demand curve for inferior goods shifts inward due to the increased attainability of superior substitutes.
Shift in Demand with respect to related Goods:
With respect to related goods, when the price of a good (e.g. a hamburger) rises, the demand curve for substitute goods (e.g. chicken) shifts out, while the demand curve for complementary goods (e.g. ketchup) shifts in (i.e. there is more demand for substitute goods as they become more attractive in terms of value for money, while demand for complementary goods contracts in response to the contraction of quantity demanded of the underlying good).